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Short entry into Market Vectors Gold Miners (GDX) - June 1, 2010

|Includes: VanEck Vectors Gold Miners ETF (GDX)

Giving back a significant portion of the previous day's gains, stocks entered the past holiday weekend on a negative note. The major indices chopped around in indecisive fashion throughout most of the day, but a swift, last-minute decline ahead of the closing bell caused the broad market to finish the day substantially lower. The Nasdaq Composite lost 0.9%, as both the S&P 500 and Dow Jones Industrial Average fell 1.2%. The small-cap Russell 2000 and S&P Midcap 400 erased 1.3% and 1.1% respectively. The S&P and Dow settled in the bottom quarter of their intraday ranges. Showing a bit of relative strength throughout the day, the Nasdaq closed just below the middle of the day's range.

Turnover was mixed. Easing for a third straight day, total volume in the NYSE was 9% lighter than the previous day's level. Total volume in the Nasdaq ticked 2% higher. Not surprisingly, trading in both exchanges was below 50-day average levels; volume typically recedes ahead of three-day weekends. In the NYSE, declining volume exceeded advancing volume by a margin of 5 to 1. The Nasdaq adv/dec volume ratio was negative by 4 to 1. These ratios indicate last Friday's selling was broad-based, rather than concentrated on just a few industry sectors.

Last Friday afternoon, we initiated a new short position in Market Vectors Gold Miners (NYSEARCA:GDX). The daily chart below summarizes the setup:

GDX

On May 11, GDX gapped up sharply and looked as though it was on its way to a new high, but it quickly stalled and reversed upon running into resistance of its December 2009 high a day later. Two weeks lower, GDX had plunged through support of its 50-day MA and formed a "lower low" (shown on the chart above). Though GDX subsequently bounced off support of its 200-day moving average, it may now be forming a "lower high" that follows the "lower low" recently set. It's also trading at resistance of its 50% Fibonacci retracement level from its May 2010 high to low. Furthermore, GDX now appears to be forming the right shoulder of a bearish "head and shoulders" pattern (with a descending neckline, the weakest kind).

Although the performance of GDX is somewhat correlated to the trend of the actual spot gold commodity (NYSEARCA:GLD), individual gold mining stocks do not always move in sync with the actual precious metal. In recent months, GDX has been lagging behind and showing relative weakness GLD. Last month, for example, GLD traded to a new all-time high (albeit briefly), but GDX merely formed a potential "double top" at its prior highs. Now, because of how steep its last retracement was, GLD may be stalling on the way back up to its prior high. But even if it doesn't, there is clear relative weakness in the individual mining stocks (and GDX).

In our May 28 commentary, we said the broad market may be finding support to form a short-term uptrend, but the intermediate-term trends remain "down." Given that last Friday's session was marked by substantial losses, nothing has changed going into today. Our primary plan is still to initiate new short positions into strength of any weak ETFs that bounce into major resistance levels. USO, BBH, and PPH, all of which were discussed in our most recent commentary, are a few such ETFs on our short watchlist. Finally, remember that day-to-day volatility remains high. As such, consider taking reduced share size, along with wider stops, on any new positions entered this week.


Open ETF positions:

Long - UNG
Short (including inversely correlated "short ETFs") - GDX
The commentary above is an abbreviated version of a daily ETF trading newsletter, The Wagner Daily. Regular subscribers receive daily updates on all open positions, as well as new ETF trade setups with detailed trigger, stop, and target prices. Intraday Trade Alerts are also sent via e-mail and/or text message, on as-needed basis. For your free 1-month trial to the full version of The Wagner Daily, or to learn about our other services, please visit morpheustrading.com.

Deron Wagner is the Founder and Head Portfolio Manager of Morpheus Trading Group, a capital management and trader education firm launched in 2001. Wagner is the author of the best-selling book, Trading ETFs: Gaining An Edge With Technical Analysis (Bloomberg Press, August 2008), and also appears in the popular DVD video, Sector Trading Strategies (Marketplace Books, June 2002). He is also co-author of both The Long-Term Day Trader (Career Press, April 2000) and The After-Hours Trader (McGraw Hill, August 2000). Past television appearances include CNBC, ABC, and Yahoo! FinanceVision. Wagner is a frequent guest speaker at various trading and financial conferences around the world, and can be reached by sending e-mail to deron@morpheustrading.com.



DISCLAIMER: There is a risk for substantial losses trading securities and commodities. This material is for information purposes only and should not be construed as an offer or solicitation of an offer to buy or sell any securities. Morpheus Trading, LLC (hereinafter "The Company") is not a licensed broker, broker-dealer, market maker, investment banker, investment advisor, analyst or underwriter. This discussion contains forward-looking statements that involve risks and uncertainties. A stock's actual results could differ materially from descriptions given. The companies discussed in this report have not approved any statements made by The Company. Please consult a broker or financial planner before purchasing or selling any securities discussed in The Wagner Daily (hereinafter "The Newsletter"). The Company has not been compensated by any of the companies listed herein, or by their affiliates, agents, officers or employees for the preparation and distribution of any materials in The Newsletter. The Company and/or its affiliates, officers, directors and employees may or may not buy, sell or have positions in the securities discussed in The Newsletter and may profit in the event the shares of the companies discussed in The Newsletter rise or fall in value. Past performance never guarantees future results.

Charts created by TradeStation (tradestation.com).

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Reproduction without permission is strictly prohibited.


Disclosure: Long UNG, Short GDX